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3 Growth Stocks at Deep-Value Prices

Among the pearls of wisdom Warren Buffett has dropped along the way in his long investing career, the saying "price is what you pay, value is what you get" is one of his more famous ones. And when looking for a deep-value stock, that phrase is highly appropriate.

Don't concentrate solely on the prices Tractor Supply Company(NASDAQ:TSCO), Verizon(NYSE:VZ), or The Chefs' Warehouse(NASDAQ:CHEF) are trading at to determine whether they're a good value; dive deeper to see why, despite their prices, they are bargain-basement stocks.

This retailer is still thriving

Brian Feroldi (Tractor Supply): If you're a city dweller, then the odds are good that you've never set foot in a Tractor Supply store before. That's because this retailer primarily caters to country folk who live in rural areas and have a unique set of product needs -- think animal feed, fences, tools, and outdoor gear. Tractor Supply has been highly successful at fulfilling its customers' needs for years. That's taking long-term investors on a highly profitable ride:

What's amazing about these numbers is that Tractor Supply has generated them without much help from online sales at all. In fact, the company only recently rolled out its "buy online, pick up in-store" program, which is something that other retailers have offered for years. This suggests that Tractor Supply's success is largely owed to its first-mover advantage in many rural areas.

Despite its history of success, Tractor Supply's stock has been whacked recently on the back of tepid earnings and the general retailer malaise. However, I'm still bullish on this company because same-store sales are growing and there is still plenty of room left in the U.S. for store growth -- especially when you factor in the company's PetSense concept.

Wall Street shares my bullishness and is projecting earnings-per-share (EPS) growth in excess of 11% annually over the next five years. That's quite compelling for a company that is only trading at 16 times forward earnings and offers up a dividend yield of 1.8%.

Can you hear me now?

Travis Hoium (Verizon): Paying a cellphone bill has become one of the most common expenses for Americans in 2017, and Verizon is one of the biggest beneficiaries of that spending. The company has one of the top two cellular networks, along with AT&T, and is able to generate long-term consistent cash flow from customers under contract.

You can see in the chart below that Verizon's growth and free cash flow have taken a step backward in the last year, but that's for good reason. Aging 4G networks are coming under immense competition from T-Mobile and Sprint, causing price pressure for Verizon. At the same time, the company is investing in its next-generation 5G network.

It's the 5G wireless network that makes me bullish on Verizon's growth and long-term cash flow. The company has a much bigger balance sheet than rivals like Sprint and T-Mobile, allowing it to launch a nationwide network more quickly. As the network rolls out, we'll see millions of new devices from self-driving cars, wireless watches, VR devices, and more connected to Verizon's network.

Verizon's stock is a great value at 12.6 times trailing earnings, and a 4.8% dividend yield should please income investors. Long-term, this is a company that should grow from its already massive base because I see no sign that the future isn't becoming even more wireless than it is today.

Image source: Getty Images.

A seat at the table

Rich Duprey (The Chefs' Warehouse): Despite the malaise in the restaurant industry, one of the best-performing sectors has been fine dining, which -- until August anyway -- had experienced growth every month so far this year. Now, for two consecutive months, same-store sales have been down. In September, the segment was the worst performer, due largely to Hurricanes Harvey and Irma hitting Texas and Florida hard.

Even so, The Chefs' Warehouse still finds itself up 26% year to date and over 70% higher for the past 12 months. The specialty food products distributor makes sure fine dining establishments, country clubs, cruise lines, and other specialty food places have unique center-of-plate dishes to offer customers to set themselves apart from the competition.

Although expenses have grown, organic growth is still charging ahead, up 10% in the second quarter, which it seeks to expand upon by bringing chain restaurants into the fold. It is also in the direct-to-consumer market now, too. The restaurant business may be in a decline, but it is beginning to rebound, and analysts see 2018 getting better for the industry.

So how do we get to The Chefs' Warehouse being a deep-value stock? Despite trading at 42 times trailing earnings and 34 times next year's estimates, the market values it at just 12 times the free cash flow it produces. The specialty food distributor is expected to grow earnings at 15% annually for the next five years, with profits anticipated to be 42% higher next year.

This small-cap stock is valued at only $523 million at the moment, but it has the potential to become a billion-dollar leader as restaurants seek to gain an edge over the competition by putting The Chefs' Warehouse's unique dishes on their menus.

Brian Feroldi has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. Travis Hoium owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends The Chefs' Warehouse and Tractor Supply. The Motley Fool has a disclosure policy.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow him on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.